Apple’s Quiet, Brutal War on Wireless Carriers

by Steve Wildstrom   |   February 8th, 2012

Steve Jobs made no secret of his disdain for wireless carriers. In 2005, when Apple was still denying any interest in getting into the phone business,  Jobs sneered at the four major U.S. carriers as the “four orifices” through which the wireless business passed. With the launch of the original iPhone, Apple made a concerted, but failed, effort to change how the wireless carriers did business by getting AT&T to sell the phone without a subsidy.

iPhone 4SJobs had to make a peace of sorts with the carriers because that was the only way  to get the iPhone into the hands of customers. But now he seems to be wreaking posthumous revenge on his old foes. The problem is simple. The carriers are selling tons of iPhones. and  Apple is collecting all the profit. Sprint reported yesterday that it sold 1.8 million iPhones in the fourth quarter, 40% of them from customers new to Sprint.  But the massive subsidy cost, at least $300 a unit, contributed to a $1.3 billion loss in the quarter (and to Apple’s staggering profit in the same period.) As PCWeek.com’s phone maven Sascha Segan tweeted, “Sprint’s quarterly results show once again how the iPhone is a way to transfer $ from carriers to Apple.” In a CNNMoney post headlined “The iPhone is a nightmare for carriers,” David Goldman quoted Nomura Securities analyst Mick McCormack as saying: “A logical conclusion is that the iPhone is not good for wireless carriers. When we look at the direct and indirect economics that Apple has managed to extract from the carriers, the carrier-level value destruction is quite evident.”

There’s not a lot carriers can do about it. The original deal Apple offered in 2007 was almost certainly better for them. Apple relented after  AT&T pushed to renegotiate the deal and, more important, additional carriers outside the U.S. refused to go along with Apple’s terms. The carriers got what they wanted, and now they are paying the price, having yielded control to Apple over pricing, branding, apps. and just about everything else in the customer experience.

Cable operators might want to take a close look at what Apple has done to the mobile phone industry. It has been widely reported in the last few days that Apple has been talking to cable operators, including Rogers communications and BCE in Canada, about partnering in a long-rumored Apple television venture. Apple has no more love for cable operators than it does for wireless carriers, but it needed the carriers because they control the spectrum and it needs the operators because they control the content. Somehow, though, these partnerships have a way of becoming terribly one-sided. I hope Apple can revolutionize the television experience, but I’d advise the cable guys to watch their wallets.

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • theTruth

    Nt sure how you can discuss carrier profits and their cost(subsidy to Apple) with out discussing the monthly revenue the carriers get from those same phone sales

  • Jurassic

    #1: We consumers should not be feeling pity for the mobile service carriers. We should be feeling contempt for them. They have been in collusion, overcharging consumers for service for years (look at how much less European carriers who also sell the iPhone charge their customers for the same or better service… and they still make a nice profit).

    #2: As much as these same North American carriers complain about “hard times”, it is a WMD-type of ruse. If the iPhone was such a bad deal for them financially, they would stop selling them (but they haven’t done this). The iPhone is actually a great deal for them in the long-term. It has boosted their client numbers, increased sales of expensive data packages, increased long-term retention, and it has greatly reduced the support and return costs compared to other similar products.

    If you think you should be feeling sympathy for these mobile carriers… think again!

  • http://www.facebook.com/donald.m.kraig Donald Michael Kraig

    What an amazingly obvious and shortsighted article! Your points concern Sprint are absolutely correct and totally taken out of context. It’s correct in stating the number of phones sold by Sprint and their losses for the quarter. HOWEVER, once Sprint pays Apple for the phones, they rake in money for two years. At $70 per month, that’s an astounding $1680, meaning they’ll gross over 1350 per phone sold. The loss you indicate (also experienced by other carriers) is simply a short-term cash flow issue.

    Next time, try looking at situations for longer than 3 months at a time. I realize you may be challenged in attempting this, but give it a try! With practice, you may actually be able to look at such things as yearly profits! Wow! You’ll be right there playing with the big boys.

  • ET

    It would be great if the carriers would change their business model to one in which we all just pay for what we use when we use it. Instead, they sell tiered plans, with heavy punishment for overages, to make sure we all buy more than we need. The “Unlimited” plans, and larger than needed base plans, are set up so that the majority of “average” users heavily subsidize the “heavy” users. These socialistic business models result in higher costs for most of us, and higher peak demands placed on the infrastructure.

    The business model Apple, and Steve Jobs, historically preferred was one in which we pay for what we get – we pay for what we use – we pay for what we want – we own and use what we pay for. Apple has historically not been big on subscription services or ad supported services, though with iAds and Match they are venturing into those areas.

    I prefer the old way of paying for what I use, and owning what I pay for. I would prefer to pay a reasonable service fee for access to a service, then pay for the actual services I use, instead of a lump sum that is the same for everyone. I would also prefer that everyone had to buy their phone outright, then pay for only the talk, text, data they use. I want to own my phone, and use it for as long as I want without having to pay high cell phone service rates with subsidies built in for those folks who want to change phones every chance they get.

    • synthmeister

      agreed
      I would simply like to see a data plan that includes everything (talk/text/data/) shared between any device (phone/tablet/laptop) I feel like using on any given day.

    • djr12

      I agree on paying for what you use. I will never have any pity for carriers as long as they persist in their 2-pronged assault on my wallet: pay a minimum rate every month, no matter how much data and bandwidth you use, and then if you exceed our limits, pay extra. Frankly that kind of billing should be illegal. Either I pay a flat rate, or I pay for what I use. They get to have it both ways, so boo-hoo for them if their profiteering is interrupted for a little bit.

  • thomcarl

    “posthumous revenge”? Got an Apple problem steve? If the carriers are in trouble it’s their own fault not, not Steve Jobs or Apple.

  • dorkus_maximus

    If folks lack sympathy for the cell phone carriers, how are they going to feel about any hard bargain Apple drives with the cable companies? Only Satan is disliked more, and that just barely.

    • jamesdbailey

      @dorkus_maximus
      “cable companies? Only Satan is disliked more”

      Well, congress….

  • http://www.facebook.com/people/Bob-Forsberg/100001387343371 Bob Forsberg

    Carriers don’t complain like writers do, because they know their business. Carriers are aware with the loot Apple has in its safe, it can become its own carrier/provider for phone, data and tv.

  • Guest

    Bull-hocky! I’ll just add that texting fees/plans is just free money to these lousy wireless carriers. I’m glad that the iPhone offers 3-party apps and iMessage to circumvent unfair wireless charges for text messages.

  • Boltar

    How on earth you can characterize what you have described as “Apple’s brutal war on carriers” is certainly beyond me as a native English speaker. Even “hoist by their own petard” would be a bit much given that (1) no one has a gun to their corporate heads, (2) the device is actually bringing them new customers, and (3) the carriers chose and as you say even insisted on the subsidized model where they pay big dollars up front for each contract through subsidy but make out quite handsomely over the course of the 2-year contracts.

    In fact sounds like here Apple was just being a reasonable business rather than the paragon of craftiness we hear about daily now. If your customers demand to be allowed to pay more than you are asking for your product, what kind of business would refuse?

    • orthorim

      The headline is pure link baiting, and we fell for it.

      I’ll put “tech pinions” on my blocked list from now on – senseless.

      • benbajarin

        Sorry you feel that way. I encourage you to read more of our content and see if you still agree.

        • orthorim

          - The article has no merit (Sprint’s loss is in no way related to how “expensive” the iPhone is. Sprint makes the rules and sets the prices for its subsidies, and monthly plans, and will reap a healthy profit on the payout that represents iPhone subsidies.
          - Even if the article had merit, the headline is unrelated. Apple isn’t waging war on carriers. Not even trying to.

          Conclusion: Link baiting. Must block.

          • benbajarin

            I can respect that if it is your opinion. I did mean other articles though not just this one.

  • jbelkin

    It’s clear that the telcos DO NOT KNOW how to run their businesses properly. The question to ask is why they couldn’t come up with the iPhone? Obviously it is wildly beyond their ken, the only thing they manage to do is to block aspects of functionality and add crapware – that was their sole addition to the economic equation. While the web and world interconnectivity was going on – they had ZERO ANSWERS. “Cosnumers don’t want touchscreen,” “they don’t want to surf the internet,” BLAH BLAH BLAH … They are in effect, idiots. So, if they cannot run a business, why offer them sympathy? Apple finally delivered the phone consumers wanted – even willing to wait 20 months for it … so the telcos have no one to blame but themselves. First, if they had a clue, they would all get together on ONE frequency/standard – why do we need two competing standards AND a whole slew of frequencies that they do NOT share … THEY PAINTED themselves into a corner where they have to put up their own cell stations … if it was up to them, the internet would be on 10 frequences and 4 different standards … they have no one to blame for their own idiocy. At least conusmers have Apple who finally designed a phone where we decode what to add to it.

  • Mutatioveritas

    I, for one, am ever thankful for Apple blowing the previous model of data-channeling through a carrier out of the water. Nothing was more infuriating than Verizon locking customers in to buying anything they might need on a phone over their system. Remember leasing an effing game for a monthly fee? Are you kidding me? Remember how difficult it was to get any music on your phone from your computer? Apple has a track record of disrupting business as usual, businesses that are often stratified and oriented around legacy (read: expired) assumptions and providers that have the system locked in, allowing users very little flexibility re: what they can have or do. Ever seen the comparisons between the US internet providers and those in other countries? Per $ many countries are far ahead of the US in both broadband deployment, speed, and cost and yet US providers perpetually whine about how they just aren’t making enough money. I will happily watch as Apple destroys the common delivery system of TV shows with an iTV. I would love it if I could just select and pay for the channels I want to watch or more specifically, the shows I want to watch. Much like iTunes, it can and will shake up the crap mentality that used to orient record companies of packing a few hit singles in an otherwise crap album. IMO, there are a fair share of great shows that have gone under because people may have been watching in non-traditional fashion, torrents, newsgroups, that don’t show up on the radar. Having a system inlace that allows such shows to be better tracked in terms of “consumption” will give us a better sense of viability and quality of given program. Can’t wait. BTW, It’s not true that Apple knows what we want before we do. I know what I want and Apple has done a fantastic job of making it happen from my MacBook Pro, to my iPod touch, and my iPhone (If you didn’t know you wanted a means to get to the voicemail you really want to hear before visual voicemail, your brain wasn’t working). Apple is mindful of what the end user experience should be like and typically compromises only in the event that a new “feature” will potentially be watered down or limit the overall experience? e.g., 4G tech with 3 hour battery life?-not so much.

  • orthorim

    Huh? How are subsidy costs Apple’s doing? Carriers are free to sell devices without subsidy, and/or to make up their own terms for subsidies. Normally this means the carriers are getting their money back at a very high interest as they “hide” the subsidy payback in their (inflated) monthly plan costs.

    The way this works is that a carrier offers _only_ subsidized costs – so consumers can’t make a choice between a low monthly rate without subsidy, or a high monthly rate for paying back the subsidy – all plans already have the subsidy payback built in. It’s not a choice at all.

    The rip off is on part of the carriers, plainly. That Sprint takes a loss is unsurprising. It’s not a loss so much as it’s an investment that’ll pay off very nicely over the next 24 months.

    Where do you even find “analysts” that don’t understand the subsidy game?